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Collecting Rents if Your Property is in Foreclosure

Q: I have a residential rental property that is scheduled to go to foreclosure in approximately 90 days, and a tenant living in that property who refuses to pay rent. He insists that new laws have been passed which allow him to not pay rent if I am not paying the mortgage. I feel bad for him as a tenant, so should I let him continue to live in the property without paying rent?

A: Your tenant is correct in that a relatively new law has been instituted that protects tenants living in a property that goes into foreclosure. However, he is incorrect in his belief that the law allows him to live in the property rent free. Plus, there may be some wisdom in evicting the tenant, even if the property is going into foreclosure.

In May of last year, President Obama signed into law the Protecting Tenants at Foreclosure Act of 2009. This law allows a tenant to continue living in a residential rental property even after the owner loses the property to a Trustee’s sale / foreclosure, as long as certain criteria are met.

By obtaining the property at foreclosure, the new owner automatically takes over the right to collect rents on the property. Under the Act, the new owner’s rights vary greatly depending on whether she is obtaining the property as an owner-occupier, or as an owner-investor. If she intends to occupy the home as a primary residence, then she can evict the tenant 90 days after obtaining the property. If she is only going to be an owner-investor, however, then the tenant may live out the full term of any written lease agreement made with the prior owner. If there is no written lease, the tenant still has the 90-day protection.

To qualify for any of these protections, the tenant must continue paying the rent to the new owner. If the tenant does not, he faces eviction. This is consistent with Arizona’s policy of not allowing tenants to “rent strike”.

If the tenant refuses to pay rent to you leading up to the foreclosure, it may be wise to consider proceeding with an eviction. If you do not, the tenant may have a breach of contract claim against you for failing to live up to your end of the agreement by letting the property go to foreclosure. A judgment against the tenant for non-payment of rent, however, will likely cut off the tenant’s ability to later prevail in a lawsuit for breach of contract.